According to a readout of the call from Johnson’s office, the British leader updated Macron on his April 9 visit to Kyiv. “The Prime Minister updated on his visit to Kyiv last month and shared his conviction that Ukraine would win, supported with the right level of defensive military assistance,” the readout said.
The readout said Johnson “urged against any negotiations with Russia on terms that gave credence to the Kremlin’s false narrative for the invasion but stressed that this was a decision for the Ukrainian government.”
According to a report from Ukrainska Pravda citing sources close to Ukrainian President Volodymyr Zelensky, Johnson told the Ukrainian leader during his Kyiv visit that Russian President Vladimir Putin should be pressured, not negotiated with.
The report said that Johnson told Zelensky that “even if Ukraine is ready to sign some agreements on guarantees with Putin,” Kyiv’s Western backers are not ready. The report said Johnson’s position is that of the “collective West,” which now feels Putin is not as strong as they initially thought and see the war as an opportunity to “press him.”
The Biden administration has abandoned diplomacy with Russia and does not appear to be interested in a diplomatic solution to end the war. Secretary of State Antony Blinken hasn’t spoken with Russian Foreign Minister Sergey Lavrov since February 15, and President Biden has no known plans to hold talks with Putin.
Macron is one of the few Western leaders that has held talks with Putin since Russia invaded Ukraine and favors negotiations as a way to end the war. On Monday, he said peace would be achieved through negotiations. “We will have a peace to build tomorrow, let us never forget that … We will have to do this with Ukraine and Russia around the table. The end of the discussion and the negotiation will be set by Ukraine and Russia.”
Another western fighter goes to Ukraine and comes back describing what a disorganized shitshow it is, in contrast to the narrative of victory coming out of the Ukrainian government and western media.
Prior to its 2022 invasion of Ukraine, Russia—and to a lesser extent Ukraine itself—had helped ensure a steady supply of commodities and services critical to a smoothly functioning global economy, some of them little noticed by anyone but specialists. Now, the war begun on Feb. 24, together with the subsequent waves of unprecedented Western sanctions, the corporate exodus from Russia and Moscow’s own responses to these measures have caused tangible damage to a number of major sectors of the global economy—including energy, agriculture, aviation and the production of high-tech goods like computer chips and electric-car batteries—compounding damage done by the COVID-19 pandemic.
Top officials at international financial institutions have warned that the war’s disruptions to global trade could push millions of people into poverty, causing food riots and lasting damage to poorer countries’ economies. The tremors have already been felt—from sovereign default in Sri Lanka to deadly unrest in Peru.
For many observers, the scale of these ripple effects has come as a surprise. Depending on the metric, Russia’s economy ranks somewhere between sixth- and 12th-largest in the world, but its heft has typically been attributed almost exclusively to hydrocarbons—a “gas station with nukes,” as historian Yuval Noah Harari quipped a week into the war. Both President Joe Biden and his former boss, Barack Obama, have shrugged off the country as a bit player on the international economic stage. This is understandable: No matter the measure, Russia accounts for less than 3.3% of the world’s overall economic output. But what such a mile-high view of Russia’s economy doesn’t take into account is its outsized role in several key sectors of the global economy.
Here is a snapshot of five such sectors that have thus far been significantly impacted by Moscow’s invasion and its economic fallout.
1. ENERGY
How Russia mattered: Last year Russia was the world’s largest exporter of natural gas, second-largest exporter of crude oil and third-largest exporter of coal. It also enriches more uranium for use in nuclear power plants than any other country in the world.
Impacts: The supply of Russian energy on world markets is shrinking due to sanctions and jitters among key players in the producer-to-consumer chain. Diminished supplies have been pushing up oil, gas and coal prices, some of them already high post-pandemic. The knock-on effect is straightforward: Higher energy costs drive up prices for almost anything that is manufactured or transported, from cement to cosmetics. This, in turn, creates potential political problems for incumbents worldwide.
-Oil: Within two weeks of Moscow’s invasion, spot prices for two benchmark crudes—Brent and West Texas Intermediate—jumped by 20% and 34%, respectively.1 Prices are likely to keep climbing as the proposed EU ban on imports of Russian oil advances. In the U.S., where the price of crude makes up over half the retail cost of gasoline, prices at the pump hit record highs, forcing action as high up as the White House. Globally, industry executives warn of a “systemic” shortage of diesel fuel, with prices hitting a new high in early May. The International Energy Agency says the war could trigger “the biggest supply crisis in decades,” forecasting that by May nearly 3 million barrels of oil a day—about a quarter of Russian output—will no longer be reaching the market. Major international oil companies have lost billions divesting from Russia (but have been making up the losses on surging oil prices).
-Natural gas: Europe, which got 74% of Russian exports in 2021, has been hardest hit. Prices there had been climbing steeply before the war, with Moscow blamed for capping supplies instead of sending more. Since the Ukraine invasion, prices have yo-yoed. Now, in light of Moscow’s brutality against civilians, European countries, especially top economy Germany, have been struggling to figure out how to punish Moscow with an embargo on gas without destroying their own economies.2 In the U.S., meanwhile, natural-gas prices have more than doubled so far in 2022, surging on May 3 to their highest since 2008. Americans’ electricity bills have followed suit, since gas fuels 40% of domestically produced electricity.
-Coal: Prices of coal for power generation hit a record high in March, more than tripling since the start of the year amid record levels of usage. In April, following allegations of atrocities by Russian troops in Ukraine, phased bans of Russian coal were introduced in Japan, which is the world’s third-largest importer, the U.K. and the EU, where Russian coal made up nearly half of imports in 2021, threatening to drive consumers’ costs even higher.
-Nuclear fuel: Uranium prices jumped more than 30% within three weeks of the war’s start and no one can “quickly fill Russia’s role in a complex supply chain that could take years to rejigger,” per the Wall Street Journal. Moscow said in March that it’s considering banning uranium exports to the U.S.—which got 16% of its supplies from Russia in 2020—but the impact on U.S. energy security would likely be relatively minor.
2. AGRICULTURE
How Russia mattered: Russia was the world’s top wheat exporter in 2021-2022 and is a key producer of all three nutrients that go into fertilizer. Russia was also the world’s second-largest exporter of sunflower and safflower oil, a key ingredient in many mass-produced foods.
Impact: Global food prices have struck a new high as the war in Ukraine hits supplies of grains, vegetable oils and fertilizers. Food prices in March jumped by 34% year on year, according to U.N. data—the fastest monthly rate in 14 years. Worst affected are poorer countries, already struggling from the impact of COVID-19. Humanitarian and rights groups warn that the war could leave millions hungry, especially in the Middle East and Africa, which rely heavily on Russia and Ukraine—also a major grain exporter—for agricultural products.
-Grains: Grain prices—already some of the highest in years—have soared in response to the war, the USDA writes. Russian exports are stymied by “exceptionally high insurance premiums for vessels” and sanctions that “make commercial transactions challenging.” Ukraine, which supplied 10% of global wheat exports in 2021-2022 to Russia’s 16%,3 has been forced to restrict farming activity and suspend port operations. Imports to Egypt and Turkey are expected to be especially hard hit, prompting analysts to recall that surging bread prices—due in part to drought-related production shortfalls in Russia and Ukraine—helped spark the protests of the Arab Spring in 2011-2012.
-Fertilizer: Russia was the world’s largest nitrogen exporter (16.5% of global supply) in 2018 and the third-largest exporter of both potassium (16.5%) and phosphate (12.7%), accounting for a significant share of fertilizer imports to many of the countries on Moscow’s “unfriendly” list, Farm Week Now reports, citing the most recent data available. Ukraine, too, is a key producer of these chemicals.4 Now fertilizers are becoming more expensive and harder to get due to a mix of Western sanctions and “Russia’s retaliatory export ban.” The supply crunch has led to a quintupling of prices in some markets, the AP reports, “making the world’s food supply more expensive and less abundant, as farmers skimp on nutrients for their crops and get lower yields.”
-Vegetable oils: By early March, prices had more than doubled since September 2020, according to data cited by Time magazine, driven up by the same problems that hit grain exports. While Russia accounted for some 23% of the global market in 2019, Ukraine—the world’s biggest exporter of sunflower and safflower oil—accounted for up to 46%
3. HIGH-TECH GOODS AND SERVICES
How Russia mattered: Russia mines about 37% of the world’s palladium, according to market-research firm Techcet, a key ingredient in both computer chips and electric car batteries. It also accounts for some 11% of the world’s nickel, another crucial input for EV batteries. Russia and Ukraine5 both supply other chip-making materials, including 40-50% of the world’s semiconductor-grade neon gas—a byproduct of steel manufacturing, used to feed lasers that print minute circuitry onto silicon. Both countries were home to off-shore IT teams for dozens of foreign firms.
Impact: Post-invasion sanctions and divestment have threatened supplies of key battery materials for EV makers in the U.S. and Europe, as well as computer chip makers. They have also forced Western firms to rejigger their IT outsourcing.
-Electric vehicles: Palladium prices have climbed to their highest level on record (since 1984) as sanctions threatened to disrupt output, and spiked even more after a ban on trading of Russian-produced metal. Prices for nickel likewise hit a new 11-year high in early March amid supply fears. The price surge, the Financial Times writes, is threatening “the car industry’s multibillion-dollar bet on electric vehicles,” built on the premise that batteries would keep getting cheaper.
-Computer chips: The pandemic gave chipmakers practice dealing with supply disruptions, both the Wall Street Journal and Reuters have reported: Major producers have stockpiled raw materials and diversified procurement. But the prospect of longer-term scarcity has loomed large enough to get the White House involved. One fear has been that Russia would try to punish the West by curtailing exports, including supplies of sapphire substrates.
-IT professionals: Gartner, a technology consultancy, estimates that, before the war, there were over 1 million IT professionals in Russia, Ukraine and Belarus—Moscow’s sanctioned ally—and about a quarter of them worked for consulting or outsourcing firms.6 Deutsche Bank alone had 1,500 employees in Russia developing and maintaining software and faced the loss of a quarter of its investment bank IT specialists after the war began. Russia’s IT professionals have reportedly been leaving in droves, with an industry group telling lawmakers in March that up to 70,000 had already fled and as many as 100,000 more could leave the following month.
4. METALS
How Russia mattered: Russia is the world’s third-largest exporter of steel, and Russia and Ukraine are the world’s biggest sellers of pig iron, the briquettes of iron ore used in steel production. The U.S.—the world’s largest buyer of pig iron most years—got two-thirds of its imports in 2021 from the two countries. Rusal, a sanctioned Russian firm, is the world’s biggest aluminum producer outside China, accounting for around 6% of global supplies. And Russia is a large producer of cobalt and copper.
Impact: Exports of Russian metals are threatened by the war and its economic fallout, which have already pushed prices to record highs. These problems are compounded by disruptions to supplies from Ukraine—a major producer of metals in its own right, ranking No. 8 among world steel producers.
-Steel: “Russia’s invasion threatens to turn steel into a luxury commodity,” according to The Washington Post. Prices have surged: The cost of hot-rolled coil steel hit a record high in mid-March, up nearly 250% from just before the pandemic, as did the price of rebar—the corrugated steel rods used to reinforce concrete in construction projects worldwide—which was up 150%. Prices for pig iron have nearly doubled since “fighting brought Ukrainian shipments to a halt and importers have stopped ordering from Russia,” the Wall Street Journal reports.
-Aluminum: “Of all the major industrial metals, aluminum seems to be the most exposed,” one analyst told Reuters in early March as prices headed toward record highs amid fears of diminished Russian supply. As of March 30, prices were up 26% this year.
5. AEROSPACE, AVIATION AND GLOBAL SHIPPING
How Russia mattered: Russia is the world’s third-largest producer of titanium, widely used in airplane and aeroengine manufacturing; the country also offers the shortest air routes from Asia to Europe.
Impact: The war is disrupting supply chains in the European aerospace and defense sector, including key metals deliveries, Fitch Ratings says. Global titanium prices have jumped as supplies drop, due both to sanctions on Russian banks and to secondary effects, like major freight companies’ unwillingness to keep going to Russian ports. In the skies, overflight restrictions stemming from the war have driven up costs for air travel.
-Aerospace construction: Until recently, Russia accounted for 15-20% of the global output of titanium. The metal’s unique properties—lightweight yet very strong, able to withstand high temperatures and resist corrosion—make it popular not only in the aerospace industry but others, from medical implants and surgical devices to chemical processing and parts for industrial plants. North American ferro-titanium prices rose sharply in early March after nearly half a year of little change. Western aerospace companies tried to stockpile titanium before the invasion, so seem to have a cushion for perhaps six to nine months, Fitch estimates. “But if disruptions continue beyond 2022,” the ratings agency wrote May 3, “supply availability and elevated prices may reduce aerospace companies’ profit margins and production volumes.”
-Transportation services: Russian airspace is closed to aircraft from dozens of countries in retaliation for a ban on Russian planes. Consequently, international airlines, already suffering from high fuel costs and pandemic-era slumps in demand, need longer routes to bypass Russia. These, in turn, drive up ticket prices and freight rates. Moscow claimed in March that foreign airlines were spending an extra $37.5 million a week circumventing the country. (And much has been written already about the $10 billion worth of foreign-owned jets stuck in Russia, unlikely to ever be retrieved.) Railroads have not provided as good an alternative for freight as some had hoped. And ocean shipping has its own woes; last month, insurers deemed all of Russia’s waters high risk, promising still higher costs and more complications. The EU’s latest moves to ban Russian oil could impact global shipping even further, amid reports that restrictions will affect companies that provide “any service related to the shipment of Russian crude.”
The full video was originally published by Germany’s Der Spiegel last week but was taken down without a clear explanation. Other western media outlets have reportedly shown or quoted from parts of the interview, leaving out her criticisms of the Ukrainian government and its forces.
The Bell is a non-establishment Russian media outlet.
What’s happening?
EU officials have been debating a sixth round of sanctions against Russia and the headline grabber is expected to be an oil embargo, potentially the single biggest blow against Russia’s economy and finances since the start of the “special military operation” in Ukraine.
European Commission chief Ursula von der Leyen presented Wednesday a draft package of sanctions that included a full ban on purchasing Russian oil and oil-related products by the end of 2022. It seems this was agreed to in principle by most EU countries. By Friday, the EU countries most dependent on Russian oil had negotiated individual delays in implementing the ban, but the fundamentals of the plan were unchanged.
All EU countries, except for those granted temporary exemptions, must stop importing Russian oil within six months. Within eight months, they must stop importing all other Russian oil products. The full ban will be in force before the end of the year.
From August, European shipping companies will be forbidden from transporting Russian oil by sea, and insurers will be unable to insure such voyages. Insurance for 95 percent of the world’s tanker traffic is underwritten by the International Group of P&I Clubs. Although this is registered in Britain, Bloomberg reported that it will be required to comply with the EU sanctions.
The maritime ban was originally planned to start in June but, following requests from Greece, Malta and Cyprus, the deadline was put back two months. Europe’s biggest tanker companies sail under Greek, Maltese and Cypriot flags.
Three countries – Hungary, Slovakia and the Czech Republic – secured deferments for the oil embargo until 2024. For the Czechs, the final deadline could be pushed back to June 2024 if replacement oil supplies cannot be secured sooner. All three countries, which get crude via the Russian Druzhba pipeline, are almost entirely dependent on Russian oil: Hungary gets 58 percent of its oil imports from Druzhba, the Czech Republic 86 percent and Slovakia 96 percent.
The European Commission wanted to announce a final text on an oil embargo Friday, but it proved impossible to complete the agreement by the end of the working week (all EU sanctions must be approved by all 27 members of the bloc).
Instead, EU Foreign Policy chief Josep Borrell gave representatives in Brussels time to continue working over the weekend. If no agreement can be reached, next week will see an extraordinary summit of EU foreign ministers. However, sources told Reuters on Friday that they are confident a deal will be done over the weekend.
The most vocal opponent of the embargo is Hungary, where Prime Minister Viktor Orban is far more sympathetic to Russia than most EU leaders. Orban claimed Friday that any embargo would be a “nuclear bomb” for the Hungarian economy, demanded a five-year deferment for Budapest and warned he would not support the sixth round of sanctions until Hungary’s requirements were met. But he did not threaten to veto the proposals. Behind closed doors, Hungarian officials are responding constructively, sources told Politico and Reuters, and one of them said Orban’s public protestations were merely empty threats.How would an embargo hit the Russian economy?
EU countries account for more than half of Russia’s oil exports. In January, this was 54.5 percent – or 2.29 million barrels of total Russian exports of 4.2 million barrels per day.
Russian oil represents almost 40 percent of total oil imports for EU states, according to the International Energy Agency.
The countries most dependent on Russian oil imports are Finland (65 percent of total oil imports), Poland (55 percent) and Lithuania (46 percent).
Since the start of the “special military operation”, Western companies have been voluntarily refusing to buy Russian oil. However, this “self-sanctioning” only reduced European imports by 12 percent between January and April, according to analysts firm Rystad Energy.
Some doubt the EU can be successful in its plans. It will take more than six months to completely halt EU imports of Russian crude, and claims that imports of Russian oil products (currently about 1.5 million barrels a day) can be eliminated by the end of the year should be greeted with skepticism, according to Bjornar Tonhaugen, the head of Rystad Energy’s oil market research department. Even when the embargo is in force, Russian crude could still be smuggled into Europe, for example by mixing Russian oil with other grades, according to Tonhaugen.
However, even a partial embargo will have serious consequences for Russia.
Russian Finance Minister Anton Siluanov said last month that oil production could fall 17 percent by the end of 2022 – down to 9.5 million barrels per day.
And it would fall even further in the event of an embargo, although estimates vary.
There will be a 10 percent drop in oil production in Russia in the event of an EU embargo (on top of the 10 percent drop between February and April), according to Viktor Katona, an oil analyst at Kpler. But another energy analyst told The Bell the effect could be much more serious, with Russian oil production dropping by up to 3 million barrels per day (equivalent to as much as 30 percent by the end of the year).Can Russia ‘pivot to the East’?
The impact of losing the EU market depends on how quickly Russia can redirect oil imports towards China, India and other Asian countries. Independent Chinese refiners have already ramped up orders from Russia, encouraged by big discounts, but Chinese state commodity traders fear Western sanctions and are more cautious, the FT reported this week.
Russia will try and send as much of its oil as possible to Asia. But the main oil pipeline linking China, Eastern Siberia and the Pacific has just 300,000 barrels a day of spare capacity, according to Tonhaugen of Rystad Energy. About 200,000 barrels could be sent by rail each day. That means, in total, there is capacity for another 500,000 barrels a day – roughly one sixth of the anticipated ‘lost’ exports to Europe. Additional volumes could be transported by sea, but that will greatly depend on the willingness of tankers to do business with Russian crude in the face of sanctions on shipping and insurance, said Tonhaugen.
Another serious problem will be the lack of technology available inside Russia, according to one energy analyst. International contractors can no longer work in Russia, making it harder to implement technologically complex projects such as developing hard-to-recover reserves.
If Russia is to successfully pivot its oil exports to Asia, it will take not only time, but huge amounts of investment in infrastructure. This likely means that, at least in the medium term, Russia will see a sharp fall in productivity, according to Rystad Energy analyst Darya Melnik.What does this mean for Russia’s finances?
Russian energy products accounted for 42 percent of all export earnings last year, and oil and gas exports made up 36 percent of state revenue, according to official data.
The blow to Russia’s economy will be softened by the inevitable rise in oil prices that follows an EU embargo. And, even with a sharp drop in productivity, tax revenues from the oil and gas industry in Russia will increase significantly this year, according to Rystad Energy, hitting $180 billion – up 45 percent compared to last year and up 181 percent compared with 2020.
The latest numbers from the Finance Ministry showed Russia last month received 133 billion rubles ($2 billion) less of oil and gas income than expected.
Removing all Russian oil from the market will push the price of a barrel of oil up to $150, and the average price for benchmark Brent crude this year will be $120-130, one analyst told The Bell. If we assume the average “special military operation” discount on Russian crude remains $30 (currently it’s $35), then the average price by the end of the year will be $95 per barrel. That’s well up on last year’s average of $67 and more than twice the base price for Russia’s 2022 budget ($44.2 per barrel). “The total value of exports will not decline in 2022 compared with the previous year, but it is likely that, in terms of value, the effect will be greater in 2023,” said our source.
Oil cartel OPEC is capable of moderating price increases by ramping up production, and could put Russia in a difficult position. However, despite U.S. pressure, OPEC has so far refused to increase production. Key members will not wish to be seen to support the West against Russia, but they will have to balance that against the need to keep the market stable, a source from one large international organization told The Bell. If there is a significant shortfall on the market, OPEC will likely have little choice but to increase production. Moreover, if Western sanctions on Iran are eased, Tehran could begin to increase production, The Bell’s source added.
Assessing the impact on the Russian economy – on the currency, inflation and real incomes – remains difficult without the precise details of an EU embargo. But if Russia completely loses the European market and cannot find a replacement in Asia, the budget could contract by a quarter in dollar terms, the chief economist of an international finance organization told The Bell. However, in the short term, the Russian economy will be able to withstand the impact of any embargo due to a compensatory increase in oil prices.
Peter Mironenko
Translated by Andy Potts
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